Overseas Outsourcing: Beneficial or
Detrimental?
by: Stephen Harries
Traditionally,
as a business executive, your job is to make the biggest profit possible, so why
not save money by sending your operations to another country, where operational
costs are significantly lower? Foreign
countries have a lot to offer businesses, including cheaper labor, cheaper
locations, lower operational costs and other economic incentives like tax
breaks. Thus, from a strictly business perspective it would appear,
your duty as an executive, is to opt for outsourcing. Yet, in the long term, one
must consider whether outsourcing to foreign countries is beneficial or
detrimental to the US, and its economy?
Taking a deeper look, you may see that outsourcing jobs to foreign
countries has many negative effects
as well. After all, what are the effects of job outsourcing on the
United States and its people? Job
outsourcing could be detrimental to not only the U.S. economy, but to the
citizens of the U.S., as well. As companies pull their operations out of the U.S., many
Americans are left unemployed. This
causes a snowball effect, increasing welfare need, homelessness and crime.
In addition, job outsourcing has a huge impact on the United States’
economy, causing increased taxes, a higher cost of living and a possible
recession. Although
outsourcing jobs to foreign countries will greatly benefit businesses by
offering cheaper labor, lower operational costs, tax breaks and cheaper
locations, the result of outsourcing jobs will be detrimental to the United
States economy and the American
people, by creating unemployment and a steady economic decline.
In countries such as India and the Philippines, there are few labor laws, and worker exploitation is high. This makes an attractive proposition for U.S. companies to move, both financially and operationally. Manufacturing jobs have been slipping away form U.S. shores for years. But recently, experts say, the movement of white-collar jobs overseas has accelerated as cash-strapped companies have determined that there is little downside to moving a job that pays $50,000 in the United States to country where a qualified applicant will work for $20,000. (Bates 2003, p12-14)
In the U.S., organizations like OSHA (Occupational Safety and Health
Administration) and the EPA (Environmental
Protection Agency) help protect workers, but in low cost foreign
countries, such organizations do not exist (Wikipedia,2006).
Therefore, workers in foreign countries are forced to work longer hours,
at a shockingly low wage. In
addition, there is a lack of health benefits, retirement benefits and pension costs, so if workers
are injured they are not protected by insurance or workman’s compensation. Recently
there has been high pressure mounted on companies who promote sweatshops, which
has helped to change working conditions by increasing the wage and decreasing
the working hours.
Day-to-day, operational costs become lower when a company moves its
operations to a low-cost foreign country. Products
are cheaper to manufacture, due the low cost of materials, which saves
businesses a lot of money. Cheaper
materials make
products cheaper to manufacture, yet companies can sell the
product at the same price, resulting in a larger profit margin. For
example, because of the availability of cheaper materials in China, it is
cheaper to manufacture toy cars in China and export
them back to the U.S.A.,
than it is to produce the same toy cars in the U.S., using the higher cost
materials, and then distribute
it to the U.S.
Also, the cost of real estate is substantially lower in foreign
countries. Therefore, a company has much cheaper
building and utility costs.
The governments of both the United States, and the low-cost foreign country, offer excellent tax incentives to U.S. companies that want to move their operations overseas. In an effort to give U.S. companies an edge against foreign competition, the U.S. government helps support foreign governments by using attractive tax incentives to entice U.S. companies to move their operations to foreign countries. In the cheaper foreign country, the local government will make sure that the outsourcing company receives highly attractive tax breaks that will effect the U.S. companies’ decision to move their operations abroad.
The benefits for a U.S. company moving abroad will steadily help the
increase of both economic environments, improving both foreign affairs and trade
deficits with a strong import and export market.
The pitch of discussion rose further on February 9 2004, when President
George W. Bush’s chief economic adviser, N. Gregory Mankiw, released the
annual Economic report of the President and praised off-shoring of U.S. service
jobs as a “good thing. Outsourcing is just a new way of doing international
trade,” he told reporters, adding that the practice is only “the latest
manifestation of the gains that economists have talked about” for centuries
(Council of Foreign Trade 2004).
With all the positives of job outsourcing, what is the effect on the U.S.
economy? For a start, experts
estimate that jobs will be lost to overseas companies at a rate of 12,000 –
15,000 jobs per month (Council of Foreign Trade, 2004).
This is great for the foreign country, but not what U.S. employees want
to hear. The employees that will be
hit hardest will be those who are employed in manufacturing, IT support, general
customer service and financial services.
A recent survey released by Chicago-based outplacement firm Challenger, Gray & Christmas indicated that most Americans believe that U.S. employers should be doing more to keep those jobs in the country. And, that the federal government should be doing more to train chronically unemployed Americans to fill jobs not being sent overseas. (Bates, 2003, p12-14)
The employees in foreign
countries are now just as skilled as U.S. employees, and their cost for
employment is a fraction of the cost to that of a U.S. employee. The resulting high unemployment rates, may lead to a sharp increase in
welfare claims and welfare fraud, costing the U.S. taxpayer millions annually,
which in turn will lead to higher patients claiming state programs such as
Medicade. The U.S. government may
be forced to increase taxes in order to cover this expense.
Again, this will cost millions of dollars a year for American taxpayers,
resulting in a significant increase in the cost of living.
Not only will state and federal income taxes will rise, but social
security will take a massive hit, as well. Future pension claim amounts will
then be driven down in order to accommodate a rapidly decreasing economy.
Eventually, if the cost of every day living rises, then more and more
U.S. citizens and residents will become homeless, as they cannot afford to take
care of themselves, forcing them out into the street.
As the amount of people living on the streets increases, the chances of
living in a low crime society diminish, as more people will turn to crime in
order to survive.
Losing key industries to cheaper foreign countries and increased
unemployment levels could have a devastating affect on the U.S. economy.
Studying the Great Depression of the 1930’s will demonstrate to present
governments how a sudden rise in unemployment can destabilize economies.
A recession could occur from a higher cost of living, with the cost of
goods increasing and the ability to purchase these goods decreasing; this may
create inflation in the market place. Recessions
are common in capitalist or free market economies, occurring at least once a
decade, but if the U.S. government continues to support the growth in
outsourcing of key jobs to cheaper foreign countries, then an economic
depression that was the magnitude to that of the 1930’s may be on the horizon.
The security risks of both homeland security and consumer privacy are
threatened when a company moves its operations to a foreign country.
Most foreign countries do not possess the necessary data-protection
legislations, such as safe harbor, in place to protect private information.
Recently, the Federal Deposit Insurance Corporation (FDIC) reported that
there are political and socioeconomic risks of the country itself, insufficient
controls within internal operations and transactional controls that in due
course, affect consumer privacy, insufficient privacy regulations, there are few
laws to protect trade secrets and the potential credit risks, are five major
risk areas (Quittner,
2004).
“Other issues include an
increased threat of terrorism, computer viruses, and customer identity theft.
Some experts fear that foreign companies may have substandard internal
controls” (Quittner,
2004). Americans,
in general, are not comfortable with providing personal information to someone
who is based in the U.S. Then why
would Americans feel comfortable providing the same information to someone based
in a foreign country? The potential
fraud risks are unimaginable and who is responsible?
With larger companies outsourcing their operations to foreign countries, to take advantage of lower costs and to improve production, where does this leave smaller businesses competing in the same market, who cannot afford to outsource? Capitalization is a worrying system for smaller businesses. The business owners of both large and small companies know that if the larger company has the market trust, then the smaller company cannot survive. Even with the governments controlling monopolies, capitalism is a force that is strong in thriving economic countries.
Globalization is heavily promoted as helping weaker economic climates to become stable, bringing high investments and technology that is aimed at improving and increasing production levels and living standards in the lower economic country. This all sounds ideal, but what has globalization really done for these economies? The World Trade Organization (WTO) was set up to govern globalization, but instead, gave more power to large companies (Maria, 2006).
While job outsourcing offers businesses cheaper labor, lower operational costs, tax incentives and cheaper locations, it has many negative effects on the United States’ economy and its people. There are many advantages to overseas outsourcing. U.S. based businesses that move their operations will benefit from the lower costs that foreign countries have to offer, which include, cheaper labor, low operational costs, excellent tax incentives, cheaper locations and utilities. However, this will be detrimental to the U.S. economy with possible high unemployment levels and an economic decline. Overseas outsourcing does have benefits for strong worldwide economies, benefiting the poorer foreign countries and helping them to establish an industry, which they would never have achieved on their own. Yet, what damage will this do to the employed population of the U.S. and the smaller business who stabilize the economy?
As with everything in the business world, trends come and go. The “dotcom” boom exploded and after a few years died a slow death, and the same may occur with the overseas outsourcing boom. The cheaper countries may eventually increase their production, labor and utility costs, and as soon as this happens, U.S. companies may have start looking for the next opportunity to take advantage of, and hopefully this will be back on U.S. soil.
References
Bates, S. (2003). Overseas
Outsourcing: How Big a Threat? HR
Magazine,
48(9), 12-14.
Retrieved March 16, 2006, from EBSCOhost database.
Council of Foreign Trade. (2004). Trade: Outsourcing Jobs. Retrieved
March 8, 2006, from Web site
http://www.cfr.org/publication/7749/
Web site http://theworldandeverythinginit.blogspot.com/2005/04/on-collision-path
with-globalization.html
Banker,
169(128), 8-9. Retrieved March 16,
2006, from EBSCOhost
database.